EUR Q2 2021 Fundamental Forecast

EUR/USD Oversold, Time For a Rally

The key question for EUR/USD traders looking at the second quarter of 2021 is whether the steep decline in the pair in the first quarter will reverse in Q2, and the answer is quite possibly yes. The reasons for the Q1 drop have been well rehearsed: the EU has been slower than both the US and the UK in vaccinating its people against the coronavirus. As a result, lockdowns will likely persist for longer in the EU, and the EU economy will therefore likely recover more slowly from the slump caused by the Covid-19 pandemic.

However, as the first quarter was ending, signs were beginning to emerge that the EU was taking steps to improve the vaccine rollout and repair damaged relations with countries like the UK to avoid a vaccine war. This is not to say that Euro strength can be expected all round; to the contrary falls can be expected against many other currencies.

However, EUR/USD has been exceptionally weak because of the US Dollar’s role as the safe haven of choice for most investors seeking to reduce their risk and that particular pair may therefore be due a recovery if risk appetite returns.

EUR/USD Price Chart, Daily Timeframe (September 28, 2020 – March 25, 2021)

Source: IG

Rise in UST-Bund Yield Spread May Reverse

Another factor behind the weakness of EUR/USD has been a steep rise in the 10-year US Treasury/German Bund yield spread – the extra yield from parking money in 10-year Treasury notes rather than Bunds. As the US economy expands more quickly, inflation will take off and US interest rates will rise faster, the argument goes, but again it is possible that a reversal will be seen in the second quarter as EU lockdowns are ended, benefiting EUR/USD.

US Treasury/German Bund 10-Year Yield Spread

Source: Refinitiv

Euro Weakness Elsewhere

This is all, of course, predicated on both a more optimistic market tone in Q2 and no third wave of virus infections in the EU. Moreover, EUR/USD is a special case because it has fallen so far on US Dollar buying. Against other currencies that have also dropped against the US Dollar, the Euro could well struggle as the perception persists that the EU is behind other countries in handling the pandemic and taking measures to ensure an economic recovery.